The NBFC-Retail asset under management (AUM), estimated at around Rs14 trillion as of March 2023, is expected to grow at a higher pace of 18-20% in FY2024, as growth in the unsecured loans segment, consisting of personal & consumption loans, unsecured small enterprise loans and microfinance loans, would remain strong, says ICRA report.
Secured Loans’ Sedate Growth
The NBFC-Retail asset under management (AUM), estimated at around Rs14 trillion as of March 2023, is expected to grow at a higher pace of 18-20% in FY2024, as growth in the unsecured loans segment, consisting of personal & consumption loans, unsecured small enterprise loans and microfinance loans, would remain strong, says ICRA report.
At the same time the HFC-Retail AUM, estimated at around Rs7 trillion as of March 2023, consisting of home loans (HL) and loan against property (LAP), is expected to grow at a relatively moderate 12-14% (albeit higher than the previous estimate of 11-13%) during the same period on the back of rising competition from banks. The retail loans of non-bank financial companies (NBFC-Retail) and housing finance companies (HFC-Retail), account for the bulk of the overall sector.
With a growth expectation of 10-12% in the infrastructure and other wholesale loans of NBFCs and HFCs, the total sector AUM, consisting of retail and other wholesale loans (including infrastructure loans), that stood at about Rs40 trillion as of March 2023, is estimated to grow at about 13-15% in FY2024.
A M Karthik, Vice President & Co-Group Head, Financial Sector Ratings, ICRA, explains: “High growth in the NBFC-Retail segment shall be driven by the expected expansion of 26-28% in FY2024 for the unsecured loans, which stood at about Rs5.1 trillion as of March 2023. Secured NBFC-Retail AUM, consisting of vehicle finance, gold loans and secured business loans etc, together is expected to grow at a relatively sedate albeit healthy 14-16%.”
The NBFC-Retail AUM grew by a robust pace of about 26% in the last fiscal, on the back of an uptick witnessed in all loan segments but was primarily driven by the unsecured loans, which expanded by 44%. Unsecured loans increased at a CAGR of 27% over the five-year period ended FY2023, while secured loans grew at 11% during the same period. ICRA expects unsecured loans to remain the key growth driver in the current fiscal too.
Digitalisation, Cross-Sell
Digitalisation and cross-selling have emerged as the two driving factors leading to the recent high growth in unsecured loans. The digitalisation process of various business-related (GST returns and other filings) and other borrower-level information has provided lenders with access to alternate data for onboarding new-to-credit accounts. The NBFCs are either driving digitalisation of credit on their own or are partnering with fintechs/smaller peers, especially for new-to-credit borrowers. “These arrangements are synergistic as fintechs/smaller NBFCs are able to improve their operating leverage, while larger partners are able to diversify their borrower and product segments. Based on the sample of 20 entities, the AUM under these arrangements have grown nearly three-folds in FY2023 to over Rs400 billion,” Karthik adds.
The jump in unsecured credit can also be partly attributed to the borrower-focused approach of entities vis-à-vis their product-focused approach in the past. Evolution of credit bureaus and improved understanding of borrower-level cash flows over the years have helped NBFCs fine-tune their underwriting models. The cross-sell of different loan products is being adopted to strengthen the hold on the franchise by improving borrower engagement.
Competition, Funding To Be Up
“Unsecured loans would face higher credit losses even on a steady-state basis vis-à-vis most other secured lending segments; loan losses for this segment would be about 4-6%, on a cohort basis. A continuously evolving risk-based pricing, an underwriting process and an eye on early warning signals, i.e. borrower-level leverage, events impacting borrower cash flows, etc, would remain key as the growth would remain high and more entities enter or scale-up in this segment,” Karthik elaborates.
Overall, the NBFCs & the HFCs would require incremental funding of about Rs4.7-5.0 trillion (over and above the refinancing of existing/maturing debt) in FY2024 to manage the 13-15% AUM growth. Expansion in the overall bank credit, healthy market issuances trend and strong securitisation demand shall ensure adequate fund availability for the sector. The weighted average cost of funds, however, is likely to go up by 60-80 bps in the current fiscal, driven primarily by the reset of the MCLRs during the year.
Margin pressures would be visible in the current fiscal, and be somewhat pronounced for the NBFCs, which predominantly have fixed rate loans. With no specific asset quality-related headwinds, the credit cost would remain under control for the sector. The NBFCs thus would witness a slight moderation in their return on managed assets (RoMA) vis-a-vis FY2023 level of 2.8%. The same, however, would remain healthy at 2.6-2.8%. The HFCs, with a sizeable share of their loan book at floating rate, would witness a marginal uptick in RoMA to 1.7-1.9% from 1.7% in FY2023.
